This post was inspired by someone yelling at me that insurance and drug companies were responsible for high healthcare costs in the US and if we just had a single-payer system, the cost issue would just go away.

Here are three tables that tell most of the story.

Ok, now for what all that money is being spent on:

Note that more than half of the healthcare dollar is spent on hospitals, physicians, and clinical services. That’s where you see lots of the overtreatment, overpricing, and medical fraud. Prescription drugs are just 10% of US healthcare spending. Sure, let’s figure out a way to cut the price of drugs (without discouraging innovation and investment in R &D) but cheaper drugs will hardly make a dent in overall spending.

As for the “net cost” of private health insurance, that’s the cost of insurance less paid healthcare benefits - aka administration, taxes, and profits. These net costs seem pretty steep but looked at more closely, they’re not so bad. For one thing, taxes go into the government’s coffers and the insurance industry’s profits are rather modest - just 2.4% in 2017.

And then you have to account for how much private insurers save in comparison to their government counterparts. Economists have estimated that private plans “provide better-quality medical care at 10% less cost” than the Medicare system. Private insurers also lose much less to medical fraud than Medicare and Medicaid, with a fraud rate of perhaps 1 to 1.5 percent compared to around 10 percent for Medicare and Medicaid. In other words, what private health insurance “takes” in the form of profits and higher administration costs it gives back - and then some - in more cost-effective medical care. Once we take this savings premium into consideration*, the net cost of private health insurance seems rather reasonable:

For the record, the government’s administrative cost of $45 billion is 2.7% of public healthcare expenditures (Medicare, Medicaid, and Other Programs). Then again, Medicare lost an estimated $52 billion to medical fraud in 2017 - more than three times the insurance industry’s profits that year. The government could do a lot better at preventing medical fraud. But that would mean spending more on administration.

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* I used a low-ball estimate of the savings premium in the table, since there may be some overlap between savings due to fraud prevention and savings due to superior care efficiencies.